UK bankruptcy: Time to get tough?

A report published on 20 January 2014 by the Association of Business Recovery Professionals (R3), the trade body for insolvency professionals, and reported as an exclusive in the Financial Times, proposes a number of important reforms to the current UK bankruptcy regime, including measures designed to:

• allow individuals to pay the £700 cost of bankrupting themselves over instalments, thus hopefully clearing out a massive reported backlog of individuals who really should be bankrupt already but who may be trapped in unregulated debt management plans because they cannot afford the up front cost of bankruptcy;
• extend the availability of (much lower cost) debt relief orders (DROs) to cases with up to £30,000 of total debt so the bankruptcy system is not clogged up with bankruptcies where there are negligible assets to be realised, which cases currently account for as many as half of all bankruptcies and which could have been DROs if the current threshold levels had not been set so low;
• simplify the individual voluntary arrangement (IVA) procedure to allow for approval by just 50{ba3215b0bf35eaeb06be458b3396ffbfc50bb9db10c9ff1594dfc3875e90ea48} in value of unconnected creditors where debts do not exceed £75,000, to deal with consumers who can afford to pay a contribution to their debts from income;
• reduce the current credit rating stigma of IVAs generally compared with DROs and bankruptcy having regard to the fact that IVA debtors will be contributing to their debts voluntarily and that IVAs typically deliver better dividends to creditors, to encourage people to propose IVAs where their income allows them to do so;
• restore the period during which a private individual would typically remain bankrupt to 3 years, rather than the current 1 year, so as to ensure that the remaining bankruptcies, which actually have a decent prospect of realisable assets being recovered, are pursued diligently so that a dividend can be paid to creditors.

There’s much talk that the personal insolvency regime is a ‘soft option’ for individuals in debt, particularly the way people have subsequently been able to carry on in business so soon after bankruptcy (without any apparent consequences). As personal insolvency numbers have increased and now include many professionals, commercial property owners, unsuccessful litigants and others who do not fit the traditional consumer bankruptcy model, perhaps it’s time to reconsider whether the legal regime is fit for purpose.

Too much of the system’s limited resource, it is said, is taken up dealing with cases without any prospect of a dividend.  This means that other cases, e.g. where assets may have be squirreled away overseas, diverted to family and friends in breach of the legislation, or where undischarged bankrupts are flouting their restrictions and their ignoring their duties are escaping a net which currently has to be closed within one year. Insolvency practitioners say that it takes too long to get them appointed in those cases and that the one year period often does not allow for a thorough enough investigation. If that is right (and my own experience of bankruptcy over the last 15 years or so tells me that it must be), then it means creditors have been losing out.

The proposed changes, if brought into law, could have a real impact on credit exposure in the UK. R3 is a very respected interest group in this arena and the government has proved willing to listen to much of what they have to say on such issues. If they are right, and these changes are enacted, they could help to halt the rising mountain of UK personal debt, ease a bit of pressure on those who know they will not be able to repay their debts particularly if / when interest rates do go up is eased, and – in turn and over time – bolster business confidence in the ability of the consumer to help achieve the country’s sustainable growth targets. Critics of the proposals say they remain to be convinced that increasing the limits on DROs and encouraging IVAs as alternatives to bankruptcy will have much impact on the recalcitrant debtor who may be determined to abuse any system, but it is to be hoped that they would at least conserve the limited available resource of the Insolvency Service to help (working alongside private sector insolvency practitioner accountants as office holders) to ensure that such cases result in swift and decisive action.

You can read the report containing these proposals in full here.

The report also includes a helpful overview of the current regime, in accessible terms and in glorious technicolour.

As Vice-Chairman of R3’s Southern Region I am interested to hear what people, especially those in the business community, have to say on these proposals. Perhaps your business has been affected in some way by the bankruptcy of a sole trader or an individual business partner who put themselves into bankruptcy; do you think a tougher regime would have acted as a disincentive to them such that you might have fared better over time with their continuing to work to repay you, as opposed to starting up again debt free? Perhaps you have been asked to vote on an IVA but have been appalled by its complex language and with HMRC or others proposing apparently inconsistent modifications which only make them more complex; might you be inclined to take more of a role and interest in what the IVA supervisor is doing on your behalf if the system were simpler and modifications were not allowed?

I look forward to any comments. In the meantime, please be aware that Paris Smith LLP has one of the most highly regarded and well connected insolvency teams in the South. If you are affected by any form of insolvency, from any angle, and you think a legal perspective on the problem might help, or you would just like us to help you match your needs to the right insolvency practitioner accountant for you, please do get in touch.